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Consumer Staples ETFs Head to Head: XLP vs. VDC

Zacks Equity Research
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The Consumer Staples sector has been garnering a lot of investor attention lately. The recent increase in volatility and uncertainty in the markets has increased the appeal of defensive sector investments like Consumer Staples.


Cause for Appeal


On Oct 19, the Senate passed a budget of $4 trillion in a 51-49 vote, which will allow the Republicans to move ahead with the tax cuts with a simple majority instead of the 60-vote supermajority that is generally required. However, uncertainty is mounting on the timely passing of the U.S. tax reform. Per Washington Post reports, Senate Republican leaders are weighing the impact of a one-year delay in reforms.


The primary concern weighing on the timely passing of the tax reform is that the House and Senate’s respective versions vary significantly. This might then pose some challenges in the passing of the reform without a few key changes.


Moreover, the Republicans have a slim majority in the Senate. If Roy Moore is defeated in the Dec 12 elections, the majority will be further reduced. This increased uncertainty has led to the relative appeal of staples.


Let us now discuss two ETFs focused on providing exposure to the sector.


Consumer Staples Select Sector SPDR Fund XLP


This fund seeks to provide exposure to staples stocks and tracks the Consumer Staples Select Sector Index. It has AUM of $7.9 billion and charges a low fee of 14 basis points a year. It has 34 holdings and bears significant concentration risk as over 68.5% of the assets are allocated to the top 10 holdings.


From a sector look, the fund has high exposure to Beverages, Household Products and Food & Staples Retailing, with 24.6%, 20.9% and 20.0% exposure, respectively (as of Sep 30, 2017). The fund’s top three holdings are Procter & Gamble PG, Coca-Cola Co KO and PepsiCo Inc PEP with 12.7%, 10.0% and 9.1% allocation, respectively (as of Nov 13, 2017).  The fund has returned 8.0% in a year and 5.6% year to date (as of Nov 13, 2017). XLP has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.


Vanguard Consumer Staples ETF VDC


This fund seeks to provide exposure to staples stocks and tracks the MSCI US Investable Market Consumer Staples 25/50 Index. It has AUM of $3.7 billion and charges a fee of 10 basis points a year. It has 102 holdings and bears significant concentration risk as almost 62% of the assets are allocated to the top 10 holdings.


From a sector look, the fund has high exposure to Household Products, Soft Drinks and Fertilizers & Packaged Foods & Meats, with 19.6%, 19.1% and 17.1% exposure, respectively (as of Sep 30, 2017). The fund’s top three holdings are Procter & Gamble, Coca-Cola Co and Philip Morris International Inc. (PM) with 11.6%, 9.0% and 8.5% allocation, respectively (as of Sep 30, 2017). The fund has returned 7.1% in a year and 4.2% year to date (as of Nov 13, 2017). VDC has a Zacks ETF Rank #3 with a High risk outlook (read: ETFs in Focus After Phillip Morris's Downbeat Results).


Bottom Line


XLP is more popular than VDC, as is evident from its higher AUM. However, VDC may be more appealing to investors owing to its cheaper expense ratio.  Moreover, VDC also has a more diversified exposure in terms of number of holdings.


At the same time, both the funds have had relatively similar year-to-date performance. XLP returned 1.4% more than VDC so far this year, whereas in a year, XLP outperformed VDC by 0.9%. With growing uncertainty in the markets, these ETFs are poised to offer better growth potential. However, the sector has had relatively poor performance so far this year, owing to investors’ risk appetite. Moreover, if the tax reforms are enacted, the appeal of such defensive investments will be lost as investors will seek riskier investments.


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Coca-Cola Company (The) (KO) : Free Stock Analysis Report
 
Pepsico, Inc. (PEP) : Free Stock Analysis Report
 
SPDR-CONS STPL (XLP): ETF Research Reports
 
VIPERS-CONS STA (VDC): ETF Research Reports
 
Procter & Gamble Company (The) (PG) : Free Stock Analysis Report
 
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